Tax avoidance has attracted much attention recently and been broadly linked to tax evasion. Journalist see any form of denying the government money as tax evasion as they gaily contribute to their Registered Retirement Plans and their Tax Free Saving Accounts, thus denying government taxation on those funds and thereby avoiding taxes. Tax avoidance is when you take the taxation rules as specified by the government and use them to reduce your taxable income. Call it financial Judo.Tax avoidance was first mentioned by the great English economist Adam Smith, who called it necessary so as to maximize the funds available to the economy and minimize the governments take of the gross national product which he considered unproductive.

The first legal challenge to tax avoidance occurred in the U.S.A. In a case heard in 1929 by the U.S. Supreme Court. Justice Oliver Wendell Holmes pronounced that tax avoidance was legal in the U.S.A. It was followed by a case heard in the House of Lords, England’s highest court, in 1936. In that case Lord Merton ruled in favour of Lord Westminster and against the Crown in that he ruled that a man had the right to arrange his financial affairs in such a manner as to attract the minimal amount of tax. Canada was a Dominion of the British Empire and as such that ruling applied in Canada.

The tax authorities have tried to get around that to no avail. The government gave them section 245 of the Tax Act that said the taxers could overturn any commercial undertaking that reduced taxes and tried to apply that, to no avail, to citizens.

What this means to you is that you can legally take advantage of any tax loopholes available to you and if these don’t suffice create your own as shown in the chapter “Loopholes Ahoy” in my book, “Tackling the Tax Man”.

Tax evasion is when you hide your personal income from the government and thereby reduce the base on which you can be taxed. In other words you have to reveal all of your sources of income to the government. If you are a drug smuggler or assassin have no fears as whatever you tell CRA will be kept in strictest confidence.